We’re a long way from financial security

As consumers, we’re not quite as financially vulnerable as we were this time last year, but we’re still a long way from being financially secure. This is the broad message conveyed by the consumer financial vulnerability index (CFVI) for last year’s third quarter, released this week.

What’s keeping us from financial stability? Generally speaking, job losses, increasing levels of unemployment, high levels of defaults on payments by debtors and a lack of savings are having a profound affect on recovery.

The CFVI and sub-indices use a 10-point scale, where a score of 0 to 1,99 indicates consumers who are “financially very secure” and eight to 10 indicates consumers who are very vulnerable, financially speaking.

Key findings

• We’re vulnerable when it comes to savings
  Our savings’ vulnerability increased from 4,19 during the second quarter to 4,93 during the third quarter. Savings as a percentage of disposable income were negative for the first half of the year. Household spending is up, saving is down.
• Households are spending more However, expenditure vulnerability index scores decreased from 5,45 during the third quarter of 2009 to 4,69 during the third quarter of last year, suggesting that consumers are at least better able to live within their means. Or that affluent, credit-worthy consumers are able to access more credit. Low-income consumers are worse-off as they struggle to make ends meet and cope with job losses.
• Income vulnerability levels increased
  Fortunately, a slowdown in the number of job losses means that income vulnerability should now start to improve. Job losses and unemployment hit South Africans hard last year.

The index shows that consumers continue to make arrangements to pay off their debt over a longer period, which ultimately costs them money. So although consumers with a good credit record increasingly have access to finance, those who have struggled to pay off debt continue to struggle.

Who are the most vulnerable?
The lowest income group (0 to R30 000 a year) is the most financially vulnerable, though increased vulnerability among the middle-income group (R30 000 to R100 000 a year) has also been noted. This is largely due to unemployment. Consumers earning more than R100 000 a year face less unemployment risk but are fairly deeply indebted.

The most vulnerable age group appears to be the 18- to 39-year-old age group. This is due to low labour market absorption rates for new entrants into the labour market. High levels of indebtedness have also been noted.

The index reveals that the poor financial situation consumers find themselves in can be attributed to bad financial planning, consumers spending more than they earn, too much debt, not enough savings and job losses.